Off-Sheet Arrangements in the Banking Industry
A car is a motorized wheeled vehicle designed for transport. Generally, most definitions of cars state that they are run on paved roads, seats eight-people comfortably, carry goods and generally transport individuals rather than products and also travel on public highways. However, the design of a car has changed drastically over the years and the term “car” no longer refers to the original conception of a vehicle as it was conceived by engineers after their studies in mathematics. Car makers around the world compete for market dominance in terms of both style and price, hence the current scenario where a new car model is launched every other day with new features and technology to attract customers.
Cars are classified according to the number of passenger capacity. The most popular types of car are SUVs, mid-size sedans, full-size coupes and hatch doors. SUVs are generally preferred by young people who want an SUV with good resale value and sedans are generally the choice of working people who need cargo space. Some manufacturers however, still produce full-size sedans, which are generally more fuel efficient and cheaper than their SUVs counterparts.
An important characteristic of an automobile is its capital adequacy ratio. The capital adequacy ratio or CA ratio of a car is calculated as the annual return on total cost (ACR) divided by the average age of the car. The higher the figure, the better the safety rating of the car and the higher the premium. Generally, bank loans for automobiles use a point system where each point equates to one percent of the total amount of loaned and the higher the point, the greater the risk-weighted assets of the bank. An automobile with a high-point risk-weight is considered highly risky and hence has to be rejected by most banks.
In the case of a car loan, two things are important. First, a bank needs to ensure that it has enough cushion to absorb the risk associated with the issue of the car. This cushion is referred to as the margin. Second, the bank needs to make sure that the amount of loaned is sufficient to pay for the total cost of ownership of the vehicle. If either of these two factors is substandard, the borrower may become insolvent and will have to forfeit the vehicle. The car will then be listed as such and will be sold to cover the bank’s loss.
A car loan can be of three types – bank charges, dealer financers or manufacturer financing. Each of these has its own risks and advantages. For example, bank charges include variable rate of interest, points, servicing costs and title fees while dealer financers include points, CD’s and title fees. Manufacturers only include general expenses in their capital plans while ensuring that the car they sell has a reasonable amount of capital adequacy ratio.
A major portion of car loans are unsecured, while another portion is secured by depositors. This is the reason why banks seldom offer a loan with an ultra-risky capital structure. A bank may, however, use off-balance sheet instruments like corporate bonds and debentures to raise additional funds for its depositors if there is a need to raise funds for its own internal functions. Sometimes, a bank may use recourse or counterparts to raise additional funds from time to time. In most cases, a bank resorts to recourse when there is a need to increase depositors’ share of profits but it seldom resort to counterpart or recourse in order to increase bank profits.